DERIVATIVE FINANCIAL INSTRUMENTS

6 Months Ended

Jun. 30, 2011

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

NOTE 16 – DERIVATIVE FINANCIAL INSTRUMENTS

The Company utilizes derivative financial instruments to assist in the management of interest rate sensitivity by modifying the repricing, maturity and option characteristics of certain assets and liabilities. Derivative financial instruments held by the Company at June 30, 2011 and December 31, 2010 are summarized as follows:

	June 30, 2011			December 31, 2010
	Notional		Credit	Notional	Credit
	Amount		Exposure	Amount	Exposure
	(dollars expressed in thousands)
Interest rate swap agreements	$	75,000	—	75,000	—
Customer interest rate swap agreements		50,320	704	53,696	869
Interest rate lock commitments		38,916	686	41,857	276
Forward commitments to sell mortgage-backed securities		46,800	—	84,100	1,538

The notional amounts of derivative financial instruments do not represent amounts exchanged by the parties and, therefore, are not a measure of the Company’s credit exposure through its use of these instruments. The credit exposure represents the loss the Company would incur in the event the counterparties failed completely to perform according to the terms of the derivative financial instruments and the collateral held to support the credit exposure was of no value. The Company’s credit exposure on interest rate swaps is limited to the net fair value and related accrued interest receivable reduced by the amount of collateral pledged by the counterparty. At June 30, 2011 and December 31, 2010, the Company had pledged cash of $602,000 and $1.1 million, respectively, as collateral in connection with its interest rate swap agreements. Collateral requirements are monitored on a daily basis and adjusted as necessary.

The Company realized net interest income on its derivative financial instruments of $1.9 million and $3.8 million for the three and six months ended June 30, 2010, respectively. The Company also recorded net losses on derivative financial instruments, which are included in noninterest income in the statements of operations, of $165,000 and $221,000 for the three and six months ended June 30, 2011, respectively, compared to $763,000 and $2.1 million for the comparable periods in 2010.

Interest Rate Swap Agreements. The Company entered into four interest rate swap agreements, which were designated as cash flow hedges prior to August 2009, with the objective of stabilizing the long-term cost of capital and cash flow and, accordingly, net interest expense on junior subordinated debentures to the respective call dates of certain junior subordinated debentures. These swap agreements provided for the Company to receive an adjustable rate of interest equivalent to the three-month LIBOR plus 1.65%, 1.85%, 1.61% and 2.25%, and pay a fixed rate of interest. The terms of the swap agreements provide for the Company to pay and receive interest on a quarterly basis. In December 2010, the Company terminated its $50.0 million notional interest rate swap agreement that provided for the Company to receive an adjustable rate of interest equivalent to the three-month LIBOR plus 1.85%, and pay a fixed rate of interest.

The amount receivable by the Company under these swap agreements was $143,000 and $149,000 at June 30, 2011 and December 31, 2010, respectively, and the amount payable by the Company under these swap agreements was $325,000 and $335,000 at June 30, 2011 and December 31, 2010, respectively.

In August 2009, the Company reclassified a cumulative fair value adjustment of $4.6 million on its interest rate swap agreements designated as cash flow hedges on its junior subordinated debentures from accumulated other comprehensive income to loss on derivative instruments as a result of the discontinuation of hedge accounting following the announcement of the deferral of interest payments on the underlying trust preferred securities. In conjunction with the discontinuation of hedge accounting, the net interest differential on these interest rate swap agreements was recorded as a reduction of noninterest income effective August 2009.

In 2006, the Company entered into a $200.0 million notional amount three-year interest rate swap agreement and a $200.0 million notional amount four-year interest rate swap agreement. These interest rate swap agreements were designated as cash flow hedges, to effectively lengthen the repricing characteristics of certain loans to correspond more closely with their funding source with the objective of stabilizing cash flow, and accordingly, net interest income over time. In December 2008, the Company terminated these swap agreements. The pre-tax gain of $20.8 million, in the aggregate, was being amortized as an increase to interest and fees on loans in the consolidated statements of operations over the remaining terms of the respective interest rate swap agreements, which had contractual maturity dates of September 18, 2009 and September 20, 2010. For the three and six months ended June 30, 2010, the amount of the pre-tax gain amortized as an increase to interest and fees on loans was $1.9 million and $3.8 million, respectively.

The maturity dates, notional amounts, interest rates paid and received and fair value of the Company’s interest rate swap agreements as of June 30, 2011 and December 31, 2010 were as follows:

	Notional		Interest Rate		Interest Rate
Maturity Date	Amount		Paid		Received		Fair Value
	(dollars expressed in thousands)
June 30, 2011:
July 7, 2011	$	25,000	4.40	%	1.93	%	$	(12	)
March 30, 2012		25,000	4.71		1.86			(524	)
December 15, 2012		25,000	5.57		2.50			(1,048	)
	$	75,000	4.89		2.10		$	(1,584	)
December 31, 2010:
July 7, 2011	$	25,000	4.40	%	1.94	%	$	(313	)
March 30, 2012		25,000	4.71		1.91			(822	)
December 15, 2012		25,000	5.57		2.55			(1,267	)
	$	75,000	4.89		2.13		$	(2,402	)

For interest rate swap agreements designated as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into interest income or interest expense in the same period the hedged transaction affects earnings. The ineffective portion of the change in the cash flow hedge’s gain or loss is recorded in noninterest income on each monthly measurement date. The Company did not recognize any ineffectiveness related to interest rate swap agreements that were designated as cash flow hedges during the three and six months ended June 30, 2010.

Customer Interest Rate Swap Agreements. First Bank offers interest rate swap agreements to certain customers to assist in hedging their risks of adverse changes in interest rates. First Bank serves as an intermediary between its customers and the financial markets. Each interest rate swap agreement between First Bank and its customers is offset by an interest rate swap agreement between First Bank and various counterparties. These interest rate swap agreements do not qualify for hedge accounting treatment. Changes in the fair value are recognized in noninterest income on a monthly basis. Each customer contract is paired with an offsetting contract, and as such, there is no significant impact to net income (loss). The notional amount of these interest rate swap agreement contracts at June 30, 2011 and December 31, 2010 was $50.3 million and $53.7 million, respectively.

Interest Rate Lock Commitments / Forward Commitments to Sell Mortgage-Backed Securities. Derivative financial instruments issued by the Company consist of interest rate lock commitments to originate fixed-rate loans to be sold. Commitments to originate fixed-rate loans consist primarily of residential real estate loans. These net loan commitments and loans held for sale are hedged with forward contracts to sell mortgage-backed securities, which expire in September 2011. The fair value of the interest rate lock commitments, which is included in other assets in the consolidated balance sheets, was an unrealized gain of $686,000 and $276,000 at June 30, 2011 and December 31, 2010, respectively. The fair value of the forward contracts to sell mortgage-backed securities, which is included in other assets in the consolidated balance sheets, was an unrealized loss of $96,000 at June 30, 2011 and an unrealized gain of $1.5 million at December 31, 2010. Changes in the fair value of interest rate lock commitments and forward commitments to sell mortgage-backed securities are recognized in noninterest income on a monthly basis.

The following table summarizes derivative financial instruments held by the Company, their estimated fair values and their location in the consolidated balance sheets at June 30, 2011 and December 31, 2010:

	June 30, 2011				December 31, 2010
	Balance Sheet	Fair Value			Balance Sheet	Fair Value
	Location	Gain (Loss)			Location	Gain (Loss)
	(dollars expressed in thousands)
Derivative financial instruments not designated as hedging
instruments under ASC Topic 815:
Customer interest rate swap agreements	Other assets	$	635		Other assets	$	792
Interest rate lock commitments	Other assets		686		Other assets		276
Forward commitments to sell mortgage-backed securities	Other assets		(96	)	Other assets		1,538
Total derivatives in other assets		$	1,225			$	2,606
Interest rate swap agreements	Other liabilities	$	(1,584	)	Other liabilities	$	(2,402	)
Customer interest rate swap agreements	Other liabilities		(526	)	Other liabilities		(636	)
Total derivatives in other liabilities		$	(2,110	)		$	(3,038	)

The following table summarizes amounts included in the consolidated statements of operations and in accumulated other comprehensive income (loss) in the consolidated balance sheets as of and for the three and six months ended June 30, 2011 and 2010 related to interest rate swap agreements designated as cash flow hedges:

	Three Months Ended			Six Months Ended
	June 30,			June 30,
	2011		2010	2011	2010
	(dollars expressed in thousands)
Derivative financial instruments designated as hedging instruments under ASC
Topic 815:
Interest rate swap agreements:
Amount reclassified from accumulated other comprehensive income to interest income on loans	$	—	1,915	—	3,830

The unamortized gain related to the fair value of the cash flow hedges on loans terminated in December 2008 was fully amortized effective September 2010, as previously discussed.

The following table summarizes amounts included in the consolidated statements of operations for the three and six months ended June 30, 2011 and 2010 related to non-hedging derivative instruments:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2011			2010		2011		2010
	(dollars expressed in thousands)
Derivative financial instruments not designated as hedging
instruments under ASC Topic 815:
Interest rate swap agreements:
Net loss on derivative instruments	$	(165	)	(764	)	(221	)	(2,092	)
Customer interest rate swap agreements:
Net loss on derivative instruments		—		1		—		2
Interest rate lock commitments:
Gain on loans sold and held for sale		106		1,485		410		1,616
Forward commitments to sell mortgage-backed securities:
Gain on loans sold and held for sale		8		(1,453	)	(1,634	)	(2,065	)